What is a 203k Rehabilitation Loan? What are the pros and cons?

Karen Malanga: Hi! This is Karen Malanga welcoming you to this week’s House Talk. Today, I’m so excited to have Matt Silver, the owner of Mountain Mortgage here in Bend. And what an appropriate name for Bend, Oregon especially with the snow hitting Mt. Bachelor lately.

So Matt, welcome to the program.

Matt Silver: Thank you.

Karen: Glad you could make it on this day. And I’m also excited for you to maybe explain a little bit about what you do. And I do want you to talk about your FHA 203k…

Matt: 203k Rehabilitation Loan…

Karen: Alright! Take it away Matt.

Matt: Awesome! Thanks Karen.

Well, really, the biggest thing I see in town right now—and for years—has been the lower end. People come into these homes, and they see them and they go, “Argh! It’s got brown carpet. It’s got pink appliances…”

Karen: Or popcorn ceilings…

Matt: Yeah, stuff that they think they’re going to have to put money into later after they close.

Karen: Sure. We see that all the time.

Matt: All the time! And you walk right out, and you go, “Uh…” But it’s in the right neighborhood, and it’s the right price.

Karen: Yeah.

Matt: I’ve been doing a loan with FHA for years that gives you the ability to borrow up to $35,000 to rehabilitate the home.

It can be invoices from Home Depot. It can be a contractor. Some of this stuff can be done by the homeowner. But it’s a really good program to rehabilitate the home.

A lot of these homes are rundown. They’re lower priced in the neighborhoods. And so you’re bringing it back to the standard of the neighborhood.

Karen: Well, I can see why that’s an advantage also to the FHA and to the lender on the backside because they’re ending up with a better product that they’re loaning on as well.

So, does that mean—say you’re down in maybe an older neighborhood. Maybe the homes were built in the ‘70s like Valhalla  Heights or maybe Deschutes Riverwoods. And so, when the person qualifies for the loan—like say, well, my son is looking at a house, as you know. Anyway, he’s qualified up to say $350,000, the home is at $300,000, does that easily qualify someone into the FHA 203k program or if they’re qualified up to $350,000, can they still qualify for an additional amount to fix up the home?

Do you know what I’m saying? Am I coming from the right angle here?

Matt: Yeah, yeah. With $35,000 in repairs maximum, FHA has expanded guidelines versus conventional. Everyone thinks of 45 debt-to-income—45% debt-to-income. FHA goes a little higher. So the maximum loan amount in Deschutes County is now $373,000 to $500,000…

Karen: Okay, for an FHA loan?

Matt: For an FHA. So I don’t really see people not qualifying for that extra $35,000. And they can borrow that above and beyond the price of the home.

Karen: Okay. And then, do they have a certain amount of time to complete these repairs?

Matt: Six to nine months…

Karen: Really?

Matt: Yeah… so the lender holds back the money…

Karen: So, it’s super convenient…

Matt: …to do the repairs. So, a lot of non-FHA 203k loans, you have to get a rehabilitation loan, which is a 20% down scenario, or a construction loan. FHA is 3.5% down. So, when you take the price of the home plus the $35,000 of repairs, that’s where you get your 3.5% down from.

Karen: Okay.

Matt: I mean, for somebody moving into a house, 3.5% down that includes their repairs—carpet, appliances, fences, decks, windows, roof…

Karen: …all that…

Matt: There are two types of 203k. There’s the streamline which is the one I’m talking about now…

Karen: Is that the one you use most effectively or most often?

Matt: Pretty much, pretty much. I mean, there are situations where people will rip the top of the house off and build a second story, you can do that. But with our price point of $373,000, it’s hard to find that…

Karen: Oh, definitely.

Matt: We had one that was burnt down. So it was like $80,000 for the lot, but there was a foundation there. And they rehabilitated the home.

Karen: They were able to get an FHA 203k loan on a foundation?

Matt: …just using an existing foundation.

Karen: I think you told me about that. Was that up above the old mill somewhere?

Matt: Yeah, it was up at Newport. It was one of my first project. And it blew my mind.

And that’s why I’ve been doing this program and promoting it since then because I couldn’t believe I was doing them. How would somebody not get a construction loan?

And he put 3.5% off the total project cost.

Karen: Wow!

Matt: Back then it was $316,000 or $323,000 or something, the max loan amount. So he put down his $9000…

Karen: …and built a house.

Matt: He’s got a $500,000 house now.

Karen: Wow!

Matt: So, it’s under-utilized. It’s a tough loan for the originator, for me, for my processor, for the lender…

Karen: You mean it’s a lot of work on your end?

Matt: It’s just a lot of moving parts, a lot of moving numbers and things aren’t set. So, it all comes together, but it’s a lot of moving parts.

Karen: Is it more difficult for the borrower?

Matt: I don’t think so, no…

Karen: Okay. So they just fill out their normal…

Matt: …normal  loan application. And then, there is the construction part, the rehab part. So that’s just another—

Like if they were using ABC Construction, they would have additional documents in their loan file along with their taxes and their regular documentation. You have a separate file of rehab documents.

Karen: Okay. So we’re going to take a quick break. Let’s come back and revisit this because this is super interesting to me. I bet our listeners are interested in this as well. So we’ll be back in just a minute.

[commercial]: Stay with us! More House Talk is straight ahead on 104.5 FM, 1340 AM, and KBNWTalk.com.

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[commercial]: This is House Talk. Now, once again, here’s your host, Karen Malanga.

Karen: Hi! Welcome back to House Talk. This is Karen Malanga, principal broker at RE/MAX Key Properties. And I’m lucky to be visiting with Matt Silver, owner of Mountain Mortgage here  in Bend, Oregon.

Matt was discussing the FHA 203k. I call it the rehab loan. Matt, can we continue on where we left off?

Matt: For sure!

Karen: Okay, let’s go.

Matt: Awesome! So…

Karen: Yes…?

Matt: We were talking during the break of the pros and cons of this loan. I believe the only downside to an FHA loan is the mortgage insurance that you’re going to pay monthly. FHA sets it up so you have an upfront mortgage insurance and a monthly mortgage insurance.

Karen: Now, can you explain mortgage insurance. Pretend I’m in kindergarten, and I have no clue what you’re talking about.

Matt: Most people don’t understand mortgage insurance. It protects the lender. It doesn’t protect you at all. It doesn’t protect the homeowner. It protects FHA. And that’s how they are able to do things that conventional loans don’t. They take more risks than conventional loans with 3.5% down. If you have a drop in the market, per se, and people can’t sell or whatever, it’s protected. As we saw in 2008, FHA was the only game in town because they had a bucket of mortgage insurance premiums to pay all the losses to the investors.

Karen: Okay.

Matt: On a $300,000 loan, the mortgage insurance would probably be around $175,000.

Karen: And so, that’s tacked on to a borrower’s monthly payment then? Is that’s what’s paid?

Matt: Correct, correct. FHA rates, because of the mortgage insurance, are lower than conventional. So today, let’s just throw out five would be where rates would come up to. Well, FHA is still low four’s. So when you equal out the two and have mortgage insurance, is it—

Karen: Sometimes, it could be [unclear 08:38]

Matt: Yeah, it’s really not that much more.

Karen: Does the mortgage insurance stay on the loan forever or…?

Matt: Yes, yes.

Karen: Oh, okay.

Matt: I take this loan as a stepping stone. I take FHA as a stepping stone.

Karen: So, explain to our listeners what you mean by that.

Matt: Regular FHA loan, lower credit, bankruptcies in the past, foreclosures in the past, they’ll lend to you, but you have the mortgage insurance. And everyone gets their bill every month and hates that mortgage insurance.

Karen: Sure.

Matt: I take it as a stepping stone. Once you rehab the home, or once you gain equity, or re-fix your credit, or have a better loan file, you can always refinance and get out of the FHA.

Karen: So, you’re using it, it’s almost for people that maybe they’ve had some trouble in the past, and so they can’t qualify for a conventional mortgage. So this  is an easier way for them to have that first step into home ownership and then clean up what happened in the past or have the past be further behind them, and then be able to refinance and get into a normal mortgage. Not normal, but…

Matt: Conventional, without mortgage insurance.

Karen: …without mortgage insurance.

Matt: Correct, correct.

Karen: So, that’s why you consider it a stepping stone.

Matt: I do! It’s a tool. It is a tool that I have. For 1) the 203k or the rehab loan builds equity.

Karen: Yeah, I was going to ask about that.

Matt: So you’re taking your rundown home,  also you put in nice appliances and flooring and new windows and a new fence or whatever you want to do, and it adds value to that home.

Karen: Sure!

Matt: Then when you go to refinance, you have built in equity based on the program.

Karen: Okay. Yeah, that makes a whole bunch of sense to me.

So,  how often do you see people  get into these FHA loans. And then, all of a sudden, they’re calling you in two years to refinance out? Does that happen fairly frequently?

Matt: All the time. All the time.

I go back to my clientele and look at all my FHA loans and see if I can pull people back out into a conventional loan. With rates rising in the last year or so, sometimes it doesn’t work out. You just got to wait. Their 30-year fixed loan, there’s no adjustable rates. If you can afford the payment, be happy with it. But it’s always good to save money. And if you can get out of mortgage insurance, give it a try!

Karen: Yeah. It’s a great loan, and not a lot of people do it.

Matt: I think it’s a great loan for a lot of specific areas in Bend. Everyone wants that—the newer kitchen counter, the newer stove, updating the lighting fixtures, or just maybe getting rid of the wallpaper for Pete’s sake.

Matt: …or the smell of a dog.

Karen: Argh, I didn’t even think about that.

Matt: When I first started these loans, it came out with a house that had frozen. And so they did the home inspection, and uh-oh, pipes burst everywhere. And they walked out. I said, “No, no. Hold on.”

You can fix those pipes. And it was a lot, but they rolled it into their loan.,

Karen: Super happy… because it was the neighborhood that they wanted.

Matt: For sure, for sure… I mean, right up over at Riley, it was a nice, newer house, just the pipes burst. And they thought “Uh-oh… we can’t do this.” I said, “Well, you can.” And with that, they actually got to choose paint color and had the flooring. They re-did everything… because of the pipes.

Karen: Yeah.

Matt: They got a big credit from the seller too but…

Karen: Sure!

Matt: It’s an under-utilized program that I do a lot of when the time comes.

Karen: …when the time comes.

Matt: Someone has to have the vision to go “Wow! Okay, yeah… you can do that.”

Karen: Someone has to really want that house or that neighborhood and realize that, now, they have some resources to be able to fix up that home and get it up to where they want it to be.

Matt: …versus dipping into savings or calling mom and dad and asking for $35,000. I’d much rather borrow it at low 4%…

Karen: That doesn’t always work.

Matt: Yeah, it doesn’t always work…

Karen: …borrowing money from family.

Matt: No, that doesn’t work. But there are options out there.

Karen: Oh, that’s really good to know Matt.

So, in order to instigate this again, just to repeat, they just apply for a normal loan through you?

Matt: Normal loan… and Mountain Mortgage and I’ve been doing paperless loans forever. It’s painless, it really is. Some of my conventional loans are way tougher—jumbo financing, stuff like that. Manual underwritten is really tough.

Karen: Okay.

Matt: FHA is streamlined, you know?

Karen: Well, we’re going to take a quick break and we’ll be right back to hear about some more of your programs that you have to offer.

This is Karen Malanga visiting with Matt Silver with Mountain Mortgage.

[commercial]:  This is house talk. Now, once again, here’s your host, Karen Malanga.

Karen: Hey, welcome back to House Talk. This is Karen Malanga, principal broker at RE/MAX Key Properties visiting with Matt Silver, the owner of Mountain Mortgage here in Bend.

The first two segments, we were discussing the FHA 203k and the ability to purchase the home and kind of rehabilitate, update it, fix it, and add some equity. And then, Matt did touch on the differences between qualifying for FHA and conventional. And he used the word “manually underwritten” when it came to conventional loans.

So Matt, I don’t think a lot of our listeners are going to understand or have come across that before. And I think that was with the jumbo. So can you explain what manually underwritten means versus not manually underwritten?

Matt: So, jumbo is a different animal altogether. In Bend, Oregon, Deschutes County, the loan limit is $453,100. It’s the conforming maximum that Fannie Mae or Freddie Mac will lend on.

Karen: Okay.

Matt: So, anything above that is jumbo. Jumbo is 20% down, 25% down, higher rates than conventional. And it usually is not an automated underwriting…

Karen: …which means…?

Matt: So Freddie Mac, Fannie Mae, most conventional loans (if not all conventional loans) have to receive an automated approval that you then send in with your loan file to the lender. And they base their underwriting decision off of those findings, that approval.

Karen: They send all the buyers’ documents and all the boxes are checked and this is…

Matt: Yeah, credit score, debt-to-income… just underwriting guideline. Seasoning, reserve—reserves are how much you need to have after you buy this house. Jumbo is up to 24 months of reserves!

Karen: And it almost seems like you’re penalized to get a jumbo loan.

Matt: For sure, for sure…

Karen: You have to put more money down, almost two years of reserves?

Matt: …in certain circumstances.

So, what I have with the lender that I work with is…

Karen: Another loan in your pocket?

Matt: This is amazing! And I don’t think it’s gotten out. I’ve done a few. But I have a conforming loan limit of $679,000 or $650,000.

Karen: So that turns a conventional not into a jumbo up to that amount? What are you saying? I don’t understand.

Matt: That is a conforming limit. Forget about that $453,000. You can go up to the $679,000 as a conforming loan. So states like California, Hawaii, even Alaska have these high cost loan limit that are more than the standard county limit.

So, Deschutes County is $453,000.

Karen: But you found someone…

Matt: The lenders I work with, a couple of them, go up to $679,000.

Karen: That’s great.

Matt: So that means 10% down versus 20%. That means if you have great credit, be it over 740, you could probably buy out the mortgage insurance if you only put 10% down. But the rates are way less than jumbo.

Karen: But they do require mortgage insurance like the FHA?

Matt: If you don’t put 20% down, conventional loans have mortgage insurance. But you can opt to buy it out which is probably another segment. But you basically take a slightly higher rate, but you don’t have the monthly mortgage insurance.

Karen: Okay.

Matt: So, if a $650,000 home has $550 mortgage insurance per month, instead you take maybe a higher rate which is $60 a month, it’s a benefit.

Karen: I see what you’re saying.

Matt: So, it’s complicated. It’s all due to credit store. And the higher the credit, the less the adjustment is for the buyout of the mortgage insurance.

Karen: Okay, I got that. Well, that sounds like an interesting program too. And you’ve done a couple of those so far?

Matt: Yeah, yeah. A lot of them are in Portland because everyone knows houses are really expensive right now.

And so, I think that the 203k is great for the lower end because you have that maximum, the $373,000 cap. And then the higher end is kind of messed up too because people can’t get these jumbo loans. So if you can get a regular conforming loan, just a regular ole’ 30-year fixed loan up to $679,000, people, their eyebrows are raised, “I don’t get it. How does that work?” But the partnership I have with some of these lenders is they lend in California at $679,000, so they’re like, “Why wouldn’t I do it in Bend, Oregon?”

Karen: Yeah!

Matt: But we have not gotten to the point where they’re raising those limits like California, San Francisco.

Karen: So you’re kind of working your way around that

Matt: You just have an investor that says, “We’ll go up to $679,000, but they have to be underwritten and have the automated approval.”

Karen: Sure!

Matt: But it’s an incredible program for someone that’s looking for a higher end home, and they don’t have 20% down, and they don’t have $25,000 in reserves.

Karen: Well, a lot of people may have the 20% down, but they’re investments are making more money. So if you look at the lower interest rates, they don’t want to pull the money out of there for the down payment. We get that all day long.

Matt: All day long! And the stock market doing its thing, it’s hard to pull money out when it’s at a loss. And you don’t want to pull it out when it’s in a gain. So I say…

Karen: So, you just never want to pull it out.

Matt: You just take a lower down payment scenario. But on these jumbo loans, people are walking away from houses. Just like these lower end 203k rehab loans, they’re another way in that’s—I don’t want to say “unconventional,” but it is. It is unconventional.

Karen: But it’s conventional.

Matt: It’s right on my rate sheet every day. And it’s something  I talk about to my realtor partners all the time. Some get it. Some go, “Okay…” And they just don’t utilize it. But if your borrower came to you and said, “I only have 10% down. I want the $700,000 house,” you go, “Yeah, we can do that” versus walking in the bank, and them saying, “Twenty percent down.”

Karen: Exactly! And rolling their eyes…

Well, you know what, Matt? We’ve got to stop. We’re done with our program, House Talk, today.

Matt: Great, great. You’re welcome.

Karen: I could talk to Matt all day long.

So anyway, this is Karen Malanga with RE/MAX Key Properties. But Matt, how can someone find you?

Matt: They could find me with my phone number, 541-280-6967 or MattSilver@Mountain-Mortgage.com. And I guarantee, if you call or email, I’m going to answer.

Karen: I know that. Thank you Matt for being on the program.

Matt: Thanks Karen.

Closing: Join us again at this time next week for more great information on the buying and selling or your home.

House Talk with Karen Malanga is not a solicitation if your property is already listed. All information on House Talk is deemed reliable but is not guaranteed.

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